It’s not a traditional economic indicator, but there is one clear sign that the economy is on the mend: Eric Rosengren, president of the Federal Reserve Bank of Boston, recently took a week off to travel with his wife to Tuscany.
Vacations have been a rarity since Rosengren took the helm at the Boston Fed in the summer of 2007, not long before the worst recession since the Great Depression steamrolled the US economy, roiling the banking system, devastating the housing market, and leaving millions of Americans jobless.
More than five years later, real estate is showing signs of new life and construction cranes dot the landscape. Consumers and businesses are gaining optimism. The national unemployment rate, while still high at 7.6 percent, has declined from its 2009 peak of 10 percent.
“The forecast is an improving economy,” Rosengren said.
The brightening outlook, however, is bringing the economy and the Fed to another crossroads as policy makers face choices of when and at what pace to withdraw the massive amounts of stimulus supporting the recovery. The consequences are potentially great.
If the Fed pulls back too much, too soon, it could damage the recovery and drive unemployment higher. If it waits too long, it could spark a burst of inflation that undermines earnings, buying power, and the values of savings, homes, and other assets.
Rosengren, 56, is one of 12 voting members of the Federal Open Market Committee that will ultimately decide a schedule to pare back the central bank’s interventions. In an interview last week, he discussed his views on economic conditions, the direction of Fed policies, and the challenges ahead for the US and Massachusetts economies.
Bringing down unemployment is one of the Federal Reserve’s key mandates and a reason Fed officials have taken unusual and extraordinary steps to stimulate economic growth. The Fed has maintained its key short-term interest rates near zero since the end of 2008. It is also buying $85 billion a month of Treasury and mortgage-backed securities as a way to hold down long-term interest rates, such as mortgages.
The debate has mounted over when the Fed should wind down these programs, even dividing the central bank’s policy makers. Rosengren said the time frame should be contingent on economic factors, including budget policies that emerge from the next round of negotiations in Congress.
The automatic budget cuts known as sequestration that Congress allowed to take effect this year have hurt economic growth, Rosengren said. Along with slowing economies in Europe and China, federal budget or fiscal policies “have caused there to be a lot more unemployed persons than we normally would expect at this stage of the recovery,” he said.
As a result, he said, it’s appropriate for the Fed to use its interest rate or monetary policies to offset the impact of tightening federal budgets. “And the more fiscal restraint we have,” he added, “the longer we should have [a stimulative] monetary policy.”
Last month, Federal Reserve chairman Ben Bernanke said the Fed could begin to gradually diminish its bond purchases later this year, spurring a sell-off in stock markets as investors fretted over the end of cheap money and the underlying strength of the US economy.
Rosengren said he believes Bernanke would favor reducing the Fed’s bond-buying program when unemployment declines to around 7 percent, but would wait until unemployment falls below 7 percent before stopping the program altogether. “That’s my own personal view,” Rosengren said.
He said the Department of Labor’s June employment report was “reasonably strong.” It showed that employers added 195,000 jobs that month and 70,000 more jobs in the previous two months than initially estimated.
Rosengren forecasts that the national unemployment rate will fall nearly a half-point to 7.2 percent by the end of this year, in line with the consensus of Fed policy makers, who expect joblessness to decline to 7.2 or 7.3 percent by year’s end.
While unemployment has been high “across the board,” Rosengren said, low interest rates have helped keep it from going higher. They have boosted home and auto sales by making borrowing more attractive to consumers, which in turn has led to employment gains in construction and manufacturing, he said.
“It’s really cheap to buy autos right now, and buy on credit. And mortgage rates, even though they’ve come up, by historical standards they’re still at pretty low levels,” Rosengren said. “So I think a lot of the improvement that we see in the economy has been significantly impacted by the monetary policies we’ve taken.”
Rosengren credits Bernanke’s leadership for policies that have helped increase demand and hiring without causing inflation to spike. Underlying inflation has been largely running below 2 percent in recent years.
Rosengren has known Bernanke since Rosengren’s days as a Boston Fed economist studying the New England housing bust of the late 1980s and the Japanese economy of the 1990s. Bernanke, who received his PhD from MIT, was a visiting scholar at the Boston Fed during this period of Rosengren’s career. Both have studied banking and financial crises and their impact on the broader economy.
Rosengren said Bernanke has been determined not to repeat mistakes made during the Great Depression, when policy makers failed to act decisively to stimulate the economy, support the banking system, and maintain flow of credit that keeps the financial system operating.
Recently, Fed watchers and other observers have speculated that Bernanke will not be reappointed when his current term ends early next year. Rosengren said Bernanke will go down in history as one of the best chairmen in Fed history.
“In the fall of 2008, I don’t think people are aware just how close the economy was to a very severe outcome,” Rosengren said. “Without his leadership I think we would have had an economic outcome that would have resulted in far higher unemployment rates that would have lasted for a much longer period of time.”
Despite that, Rosengren said, the current recovery remains frustratingly slow for too many Americans. Although Greater Boston recently had a 6.1 percent unemployment rate and “Massachusetts is in a reasonably good spot,” smaller cities and rural areas still face double-digit unemployment.
The state economy also faces risks, some of them emanating from Washington. It’s still unknown how the federal health care overhaul known as Obamacare will affect the hospital industry here, one of Massachusetts biggest employers. In addition, the across-the-board budget cuts know as sequestration are reducing federal programs important to Massachusetts and New England.
Defense spending is an important driver in the region’s economy, helping to support technology, innovation, and manufacturing here. Massachusetts’ hospitals, universities, and other research institutions also rely on federal funding.
Rosengren called sequestration a “meat cleaver” approach.
“I don’t know whether research into important medical issues is necessarily where I’d be looking for cuts to occur,” Rosengren said. “We do have to worry that the local economy is susceptible.”
Megan Woolhouse can be reached at firstname.lastname@example.org.